Michigan Law Review

Volume 116 | Issue 6

2018

Tax Havens as Producers of Corporate LawWilliam J. MoonNew York University School of Law

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Recommended CitationWilliam J. Moon, Tax Havens as Producers of Corporate Law, 116 Mich. L. Rev. 1081 (2018).Available at: https://repository.law.umich.edu/mlr/vol116/iss6/15

TAX HAVENS AS PRODUCERS OF CORPORATE LAW

William J. Moon*

Re-Imagining Offshore Finance: Market-Dominant Small Ju-risdictions in a Globalizing Financial World. By ChristopherM. Bruner. New York: Oxford University Press. 2016. Pp. xii, 236.$95.

Introduction

Bank-secrecy laws, low tax rates, and shell companies amassed at P.O.boxes are some of the common features associated with offshore financialhavens that have catapulted famous vacation destinations in the Caribbeanand elsewhere into magnets for global financial transactions.1 The culprits inthese stories—usually abetted by small offshore jurisdictions facilitating taxevasion2—range from celebrities, including Mel Gibson and Vivienne West-wood, to corporations, including Apple and Google.3 While the topic of taxevasion is nothing new,4 a series of massive document leaks in recent years,exposing the vast scope and variations of evasion schemes, has propelled

* Acting Assistant Professor, New York University School of Law. I thank BruceAckerman, Philip Alston, Ian Ayres, Lea Brilmayer, Richard R.W. Brooks, Diarra M. Guthrie,Gloria Ho, Tal Kastner, Christine Kim, Alec Stone Sweet, and Clint Wallace for helpfulconversations and comments and Alex Gulbrandsen, Kristi How, and Joann S. Park forexcellent research assistance. I also thank Christopher Bruner for his generosity in reading thepiece before its publication and the editors of the Michigan Law Review, especially Kathryn M.Brown, for terrific editorial suggestions.

1. See, e.g., Andrew Ross Sorkin, When It Comes to Tax Avoidance, Donald Trump’s Justa Small Fry, N.Y. Times: DealBook (Oct. 4, 2016), https://www.nytimes.com/2016/10/04/business/dealbook/when-it-comes-to-tax-avoidance-donald-trumps-just-a-small-fry.html (on filewith the Michigan Law Review); Storm Survivors, Economist (Feb. 16, 2013), http://www.economist.com/news/special-report/21571549-offshore-financial-centres-have-taken-battering-recently-they-have-shown-remarkable [https://perma.cc/5ZUK-EBF9].

2. Scholars typically distinguish tax evasion, a set of illicit activities aimed at reducingtaxes, from tax avoidance, which includes various legal maneuverings. See, e.g., Ronen Palanet al., Tax Havens: How Globalization Really Works 9–10 (2010). The distinction be-tween evasion and avoidance is notoriously difficult to ascertain. Pp. 19–20.

3. See Daniel Bukszpan, These Celebrities Shelter Their Wealth in Tax Havens, Fortune(Apr. 14, 2015), http://fortune.come/2015/04/14/celebrity-tax-havens/ [https://perma.cc/KAS4-SCWE]; Jonathan Chew, 7 Corporate Giants Accused of Evading Billions in Taxes, For-tune (Mar. 11, 2016), http://fortune.com/2016/03/11/apple-google-taxes-eu/ [https://perma.cc/A4H9-5MW2].

4. See Ronen Palan, Tax Havens and the Commercialization of State Sovereignty, 56 Int’lOrg. 151, 153 (2002) (tracing the emergence of the “first modern tax havens” to “the last yearsof the nineteenth century”).

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multilateral government crackdowns5 and attracted academic interests froma wide range of disciplines, including economics, international relations, andthe law.

Christopher Bruner’s Re-Imagining Offshore Finance: Market-DominantSmall Jurisdictions in a Globalizing Financial World6 is a significant contribu-tion to the literature that should become required reading for both consum-ers and producers of knowledge concerning the regulation of global financialtransactions. Bruner starts with the observation that “reducing or eliminat-ing taxes does not itself guarantee the arrival of cross-border capital” (p. 21).Instead, the handful of small jurisdictions that have become the dominantplayers in cross-border finance provide more than just low taxes and bank-secrecy laws: they offer “cutting-edge regulatory regimes in high value-addedareas of cross-border financial services” (p. 47). Bruner’s careful compara-tive case studies cut through ideologically charged old labels and reveal sev-eral important characteristics shared by certain small jurisdictions, likeBermuda and Singapore, that account for their disproportionate success inthe global market for cross-border finance.7 Bruner terms these jurisdictions“market-dominant small jurisdictions” (“MDSJs”) (pp. 7–8). There is morethan semantics at play here, for MDSJs have “much to tell us about thefuture of financial globalization, territorial sovereignty, and territorial finan-cial regulation in the twenty-first century” (p. 13).

Descriptively, Bruner’s work provides a compelling account challengingthe all-too-popular scholarly view that conceptualizes small offshore juris-dictions as parasitic entities that subsist largely at the expense of eroding thetax base of developed nations.8 To the contrary, Bruner observes that MDSJshave “promoted innovation in their areas of specialization later emulated bylarger markets, and otherwise enhanced market efficiency within such largermarkets” (p. 224). In doing so, Bruner complicates the debate over the func-tion of small offshore jurisdictions, which is largely taking place in the ab-sence of good data.

This Review situates Bruner’s contribution to the literature examiningthe regulation of cross-border finance and highlights the import of Bruner’sbook for thinking about the complex (and contested) relationship betweenterritorially configured domestic laws and the increasingly liberal movementof capital. Part I sets out the book’s central thesis. I highlight Bruner’s novelframework, which identifies the factors that propel certain small jurisdic-tions into becoming magnets for cross-border finance. I also outline the lim-its of this framework in accounting for the stability in the overall demandfor the commercialization of sovereignty. Part II examines the rise of MDSJs

5. See, e.g., Stephen Castle, E.U.’s Five Biggest Economies Join Tax Crackdown After Pan-ama Papers, N.Y. Times (Apr. 15, 2016), https://www.nytimes.com/2016/04/16/business/international/panama-papers-europe.html?_r=0 (on file with the Michigan Law Review).

6. Christopher Bruner is a Professor of Law, University of Georgia School of Law.

7. See pp. 7–8, 41–50.

8. For a seminal account, see Reuven S. Avi-Yonah, Globalization, Tax Competition, andthe Fiscal Crisis of the Welfare State, 113 Harv. L. Rev. 1575, 1578–79 (2000).

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and other offshore jurisdictions as they relate to the territorially configureddomestic rules—a subject that has yet to attract the attention that it de-serves. While Bruner views the rise of MDSJs as typifying the continueddominance of territorial sovereignty, I show that it is a reflection of a newjurisprudential tendency that deemphasizes the relationship between soiland the law. This understanding has significant implications, because smalloffshore jurisdictions, intentionally or not, increasingly supply templates ofsubstantive and procedural law that govern cross-border finance and replaceand reconstitute territorially configured domestic rules. Here, I develop aparadigm conceptualizing tax havens as “producers” of corporate law andstart a discussion about the normative desirability of this emerging trend.

I. Capital Mobility and the Winners of Cross-Border Finance

A. Market-Dominant Small Jurisdictions

Delaware maintains a preeminent status in corporate law. In the UnitedStates, corporate law—the body of law governing the relations between thefirm’s shareholders and managers—is largely a matter of state law.9 Underthe internal affairs doctrine, firms choose their state of incorporation forstatutory domicile “independent of physical presence.”10 This system sets upa competition between states to supply corporate law—one that has beendubbed the central building block underlying the “genius of American cor-porate law.”11

It was not always like this. Before the merger movement in the late nine-teenth century, corporate activities were primarily local, and corporate lawwas largely monopolized by the state where the corporation conducted itsbusiness. Capital mobility and the growth of interstate business effectivelybroke this monopoly since “[l]egislatures could not afford to . . . driv[e]business out of state to the detriment of local interests.”12 Delaware has beenthe clear winner in this “race” enabled by regulatory competition.13 Not-withstanding the state’s status as one of the smallest states in the United

9. Roberta Romano, The Genius of American Corporate Law 1–3 (1993).

10. Roberta Romano, Competition for Corporate Charters and the Lesson of Takeover Stat-utes, 61 Fordham L. Rev. 843, 843 (1993). The internal affairs doctrine “is a conflict of lawsprinciple which recognizes that only one State should have the authority to regulate a corpora-tion’s internal affairs—matters peculiar to the relationships among or between the corporationand its current officers, directors, and shareholders.” Edgar v. MITE Corp., 457 U.S. 624, 645(1982).

11. Romano, supra note 9, at 1.

12. Frederick Tung, Before Competition: Origins of the Internal Affairs Doctrine, 32 J.Corp. L. 33, 45–46 (2006).

13. Scholars vigorously disagree about whether this reflects a “race for the bottom” or arace to the top. Compare William L. Cary, Federalism and Corporate Law: Reflections uponDelaware, 83 Yale L.J. 663, 705 (1974) (describing American corporate law as encouraging a“race for the bottom”), with Ralph K. Winter, Jr., State Law, Shareholder Protection, and theTheory of the Corporation, 6 J. Legal Stud. 251, 256 (1977) (offering a race-to-the-topaccount).

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States (both by land mass and population) (p. 175), Delaware is the juridicalhome to “more than half of all U.S. publicly traded companies and 65 per-cent of Fortune 500,”14 only two of which are physically headquartered inDelaware (p. 181). Delaware derives a substantial portion of its governmentrevenue from the incorporation business (p. 176) and works hard to retainits competitive advantage in producing cutting-edge corporate law. The Del-aware General Corporation Law is a byproduct of “a decidedly cooperativepublic-private undertaking” (p. 183), while some of the country’s most re-nowned experts in business law staff its judiciary (pp. 183–84).

Delaware is just one of a handful of small jurisdictions that Bruner iden-tifies as the dominant players in cross-border finance—broadly defined toinclude insurance, Islamic finance, private wealth management, cross-borderbanking, and incorporation services (p. 7 n.19). Bruner identifies the follow-ing characteristics shared by MDSJs: (1) they are “poorly endowed with nat-ural resources,” creating a strong incentive to convert their main asset—theability to write laws—to attract foreign capital; (2) they can exercise legisla-tive autonomy, which need not be full sovereignty recognized under interna-tional law; (3) they are culturally and geographically proximate to majoreconomic powers; (4) they are rich in human capital and professional net-works; and (5) they maintain credibility with the private sector through amix of collaboration and oversight (pp. 43–47; emphasis omitted). Thesefactors, Bruner claims, reveal six paradigmatic jurisdictions that cut acrossdifferences in geographies, cultural affinities, and legal traditions: Bermuda,Delaware, Dubai, Hong Kong, Singapore, and Switzerland.15 According toBruner, these jurisdictions are “not merely successful, but literally globallydominant in specialized areas of cross-border finance” (p. 9).

Consider the fascinating case of Bermuda, an island roughly one-thirdthe size of Washington, D.C., widely recognized as one of the largest centersfor insurance and risk management in the world (pp. 51–52). Bermudasquarely fits the MDSJ paradigm. Despite being a territory of the UnitedKingdom (voluntarily), the island wields substantial legislative autonomy,enabled by the United Kingdom’s broad delegation of authority (p. 45). Ber-muda has used this autonomy to develop some of the essential ingredientsfor its success—“substantial investment in human and institutional capitalcatering to cross-border finance, as well as the development of a competitiveregulatory regime in close coordination with the private sector” (p. 56). AsBruner sees it, the legislature’s “business-friendly capacity to innovate” hasplayed a significant role in the island’s economic development (pp. 56–58).Today, this island with a population of less than 100,000 people (p. 52) is

14. Jeffrey W. Bullock, Del. Sec’y of State, Delaware Division of Corporations2013 Annual Report 2 (2014), https://corp.delaware.gov/Corporations_2013%20Annual%20Report.pdf [https://perma.cc/E525-6D32].

15. As implied by Bruner, these jurisdictions are not the only jurisdictions that would fitthe MDSJ paradigm. P. 10 (“I have consciously chosen six jurisdictions that differsubstantially . . . .”).

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home to “subsidiaries of 75% of the Fortune 100,”16 while controlling adominant share of insurance policies connected to the United States andelsewhere—evidenced by the significant growth in disputes arising underthe famous “Bermuda Form” policy insurances.17

Singapore, a small island nation in Southeast Asia almost 10,000 milesaway from Bermuda, shares similar traits. Despite being one of the smallestindependent states, Singapore has come to dominate the wealth-manage-ment industry, even while the industry in the “United States and Europegrapple with the worst slump in a generation.”18 Bruner attributes Singa-pore’s ascendance in large measure to deliberate state policies adopted in thelatter half of the twentieth century, aimed at developing the infrastructurebroadly resonant with the MDSJ concept (pp. 115–21). This includes main-taining some of “the least restrictive immigration laws in Asia for foreigntalent,”19 and a regulatory environment that is said to be closely attuned tothe interests of the private sector (pp. 129, 132). Today, this island nationwith a land mass about twice the size of Detroit20 is “the world’s fastest-growing wealth management center . . . and its share of global offshorewealth is expected to outstrip Switzerland by 2020.”21

To be sure, MDSJs do offer attractive tax rates, usually combined withsome form of bank-secrecy laws, as critics of tax havens have pointed out.Bermuda offers “no corporate or capital gains taxes”;22 Dubai generally le-vies “no direct taxes on corporate profits or personal income” on net profit

16. Foreign & Commonwealth Office, The Overseas Territories: Security, Suc-cess and Sustainability, 2012, Cm. 8374, at 92 (UK).

17. Bermuda Form Dispute Resolution Experience, K&L Gates, http://www.klgates.com/files/Uploads/Documents/Global_Insurance/Bermuda_Form_Dispute_Resolution.pdf [https://perma.cc/P79Q-8B32].

18. Neil Chatterjee & John O’Donnell, Wealth Management Prospers in Singapore, N.Y.Times (Nov. 14, 2008), http://www.nytimes.com/2008/12/14/business/worldbusiness/14iht-singapore.1.18654227.html (on file with the Michigan Law Review).

19. P. 132 (quoting Jek Aun Long & Danny Tan, The Growth of the Private Wealth Man-agement Industry in Singapore and Hong Kong, 6 Cap. Markets L.J. 104, 116–17 (2011)).

20. See Detroit Future City, 139 Square Miles (2017), https://detroitfuturecity.com/wp-content/uploads/2017/09/DFC_139-SQ-Mile_Report.pdf [https://perma.cc/QR7D-YQ27](showing Detroit spans 139 square miles); Land Area (Sq. Km.), World Bank: Data, https://data.worldbank.org/indicator/AG.LND.TOTL.K2 [https://perma.cc/K4YH-WHQN] (showingSingapore spans 273 square miles).

21. Sophie Song, Singapore, Now World’s Fastest Growing Wealth Management Hub, NotFree from Tax Evasion and Other Crimes, Int’l Bus. Times (Feb. 18, 2014, 10:40 AM), http://www.ibtimes.com/singapore-now-worlds-fastest-growing-wealth-management-hub-not-free-tax-evasion-other-1556309 [https://perma.cc/8N69-8NLR].

22. P. 57 (quoting Bermuda: Country Profile, Bus. Berm. Rev., 2012, at 19, 22).

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generated outside of Dubai;23 Singapore offers full tax exemption for for-eign-sourced income,24 with strict bank confidentiality laws that carry crimi-nal penalty for breaches (pp. 126–27); Hong Kong famously levies “no sales,withholding, capital gains, dividends, or estate taxes” (p. 137); Switzerlandoffers “competitive” tax rates and hallmark bank-secrecy law codified in itsconstitution (pp. 164, 166–67); and Delaware levies no corporate income taxon goods and services provided by Delaware corporations operating outsideof Delaware (p. 187).

But so do a lot of other small jurisdictions—including Nauru, Niue,Palau, Samoa, and Vanuatu, to name a few—that come nowhere close to thesuccess enjoyed by MDSJs (pp. 195–96). The small South Pacific island na-tion of Nauru, for instance, occupying one of the great phosphate-rock is-lands, looked to cross-border finance as a source of government revenue inthe face of dwindling phosphate sales (pp. 193–94). In the late 1990s, theisland attracted considerable criminal money—including $70 billion of Rus-sian mafia money and hundreds of “fictional” banks with no physical exis-tence (p. 194). But with its refusal to comply with multilateral anti-money-laundering initiatives in the early 2000s, the island’s share of the global mar-ket for offshore finance quickly dissipated (pp. 194–96). The problem, asBruner sees it, is that jurisdictions like Nauru fail to invest in infrastructureand resort to copying and pasting legislation from other jurisdictions, whichresults in little competitive advantage (pp. 195–96).

MDSJs offer something different than the garden variety of tax havensthat fail to maintain stability or dominance in the global market for cross-border finance—something at least partially backed up, according toBruner, by the fact that “diplomatic and legal pressures that have arisensince the 1990s have not fundamentally eroded the MDSJs’ advantages”(p. 225).

B. Limits of the MDSJ Concept

Bruner’s book is largely an effort to establish a causal claim: that thesalient characteristics shared by MDSJs account for their extraordinary suc-cess in cross-border finance. It is, therefore, unsurprising that Bruner re-mains optimistic in predicting that “small jurisdictions that have profitedpredominantly through abusive practices will ultimately fail as global stan-dards steadily improve” (p. 236).

This view finds support from recent work by legal scholars and econo-mists who argue that small offshore jurisdictions enable jurisdictional com-petition, ultimately resulting in efficient and desirable regulatory regimes.

23. P. 81 (quoting Dubai Economy, Gov’t Dubai, http://dubai.ae/en/aboutdubai/pages/dubaieconomy.aspx [https://perma.cc/H5GE-A9PN]).

24. Generally, nation-states tax on one of two bases, source or residence. Jurisdictionsdiffer on how to tax income from other jurisdictions. For a general overview on the concept offoreign-sourced income, see Edward D. Kleinbard, The Lessons of Stateless Income, 65 Tax L.Rev. 99 (2011).

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For instance, Jonathan Macey and Anna Manasco Dionne argue that regula-tory competition between offshore jurisdictions and developed economiesleads to increased innovation in regulatory rules because onshore jurisdic-tions are forced to offer more competitive transaction costs through the re-duction of regulations and the use of financial innovations.25 Others write“in praise of tax havens,” using economic models to assess that fears of a“race to the bottom” in corporate tax rates may be misplaced.26

While Bruner attempts to avoid taking sides on the policy merits ofjurisdictional tax competition (p. 35), the MDSJ concept, to a certain extent,inescapably clashes with the tax-haven literature that predominantly por-trays small jurisdictions as “parasites” of larger jurisdictions, insinuatingtheir non-value-added function.27 Embedded in the tax-haven literature isthe belief that small cash-strapped jurisdictions—acutely vulnerable to cap-ture by nonmajoritarian interest groups—introduce the potential for a raceto the bottom in tax rates and regulations.28

In my view, both accounts reflect accurate morsels of descriptive reality.Bruner is correct to observe, as are race-to-the-top proponents, that smalljurisdictions cannot achieve and sustain this measure of success withoutheavy investment in a wide range of institutional-capacity building. Thoseinvestments may in some cases lead to jurisdictional competition, resultingin innovative rules that govern cross-border financial activities.

But that causal relationship does not necessarily indicate that the ab-sence of the independent variable would lead to failure. This is true espe-cially if one starts looking at the internal political dimensions of varioussmall jurisdictions. Importantly, not all small jurisdictions benefit from in-vesting in the type of infrastructure that can lead to long-term economicdevelopment, at least from the point of view of the ruling elite. This is theendemic problem of agency: the interests of the ruling elite do not necessa-rily align with the interests of the local population.29 Where there appears tobe a severe agency problem, it may be just as lucrative from the point ofview of the ruling elite to “commercialize sovereignty.”30 Such commerciali-zation is similar to ways in which state leaders across sub-Saharan Africa,

25. Anna Manasco Dionne & Jonathan R. Macey, Offshore Finance and Onshore Markets:Racing to the Bottom, or Moving Toward Efficient?, in Offshore Financial Centers andRegulatory Competition 8, 8–10 (Andrew P. Morriss ed., 2010).

26. E.g., Qing Hong & Michael Smart, In Praise of Tax Havens: International Tax Planningand Foreign Direct Investment, 54 Eur. Econ. Rev. 82, 83–84 (2010).

27. See, e.g., Joel Slemrod & John D. Wilson, Tax Competition with Parasitic Tax Havens,93 J. Pub. Econ. 1261, 1262 (2009).

28. Palan et al., supra note 2, at 158–59.

29. See Jack L. Goldsmith & Eric A. Posner, The Limits of International Law 4–5(2005) (comparing the state to a corporation subject to agency costs).

30. See Palan, supra note 4, at 153 (describing how historical trends of political fragmen-tation and the internationalization of capital have enabled states to commercializesovereignty).

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Latin America, and Southeast Asia have profited from “selling off” land tomultinational corporations, largely at the expense of the local population.31

Noticeably absent from Bruner’s sampling are small jurisdictions likeLiberia and Panama that are active in the global market for cross-borderfinance without reaching the extraordinary level of success enjoyed byMDSJs.32 Indeed, these jurisdictions may precisely be the jurisdictions whose“core business consists of charging rent or license fees in return for grantingfirms a right to incorporate in their jurisdictions.”33

There are also important reasons to be skeptical about the effectivenessof multilateral crackdowns. For instance, a recent study by Niels Johannesenand Gabriel Zucman found that an increase in multilateral regulatory coor-dination and crackdown on tax havens resulted in “tax evaders shift[ing]deposits to havens not covered by a treaty with their home country. Thecrackdown thus caused a relocation of deposits at the benefit of the leastcompliant havens.”34 Indeed, because closing down a subset of tax havenswill make it more lucrative for the remaining havens, “renegade” jurisdic-tions are likely to thrive even in the era of heightened multilateralcoordination.35

With that said, this shortcoming does not detract from the book’s majorachievements. The MDSJ concept provokes a thoughtful line of inquiry intothinking about the role of small offshore jurisdictions in relation to the ex-isting, territorially configured domestic regulatory laws in a landscape where

31. The recent “land grab” phenomenon involving corrupt state leaders selling or leasinglarge-scale agricultural land to foreign entities is an example of this dynamic. Lea Brilmayer &William J. Moon, Regulating Land Grabs: Third Party States, Social Activism and InternationalLaw, in Rethinking Food Systems: Structural Challenges, New Strategies and theLaw 123, 124–25 (Nadia C.S. Lambek et al. eds., 2014).

32. To be sure, Bruner also examines large and successful jurisdictions—principally NewYork and London—to further illuminate the boundaries of MDSJs’ explanatory domain(p. 192). This effort, however, does not persuasively establish a negative causal inference.Bruner readily admits that his small sample of failed jurisdictions alone “hardly provide[s] arobust test of [his] causal hypotheses” (p. 192). To be fair, there is an inevitable tension be-tween supplying a sufficient number of case studies to venture causal claims and focusing inon a manageable number that one can treat in sufficient depth and sophistication. It is myhope that Bruner’s provocative thesis, laden with careful case studies, inspires further aca-demic investigation.

33. Ronen Palan, The Offshore World: Sovereign Markets, Virtual Places, andNomad Millionaires 83 (2006).

34. Niels Johannesen & Gabriel Zucman, The End of Bank Secrecy? An Evaluation of theG20 Tax Haven Crackdown, Am. Econ. J., Feb. 2014, at 65, 65.

35. See May Elsayyad & Kai A. Konrad, Fighting Multiple Tax Havens, 86 J. Int’l Econ.295, 295 (2012) (“Closing down a subset of tax havens reduces competition among the havensthat remain active. This makes their ‘tax haven business’ more profitable and shifts a largershare of rents to these remaining tax havens, making them more reluctant to give up their ‘taxhaven business.’ ”). The effectiveness of recently enacted Foreign Account Tax Compliance Act(FATCA), which imposes reporting obligations regarding offshore accounts and assets for U.S.tax payers and certain financial institutions, also remains to be seen. See generally Young Ran(Christine) Kim, Considering “Citizenship Taxation”: In Defense of FATCA, 20 Fla. Tax Rev.335, 359–67 (2017) (noting the various merits of and concerns associated with the FATCA).

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financial transactions increasingly implicate the interests of multiple juris-dictions. What makes his contribution particularly important, in my view, ishis short but provocative discussion about the future of territorial regula-tions in an era of unprecedented capital mobility. This is a topic that onlyreceives brief attention in Bruner’s book, and a concept that I develop inPart II.

II. Territorial Sovereignty and Global Finance

The prevailing account in the literature tends to conceptualize taxhavens as vehicles used by corporations and high net-worth individuals(“HNWI”) to escape otherwise applicable domestic tax liabilities.36 This lineof thought owes its intellectual debt to scholars who view the growth ofcross-border commerce—along with a private system of governance devel-oped outside of the sphere of state intervention37—as undermining territo-rial sovereignty, or even rendering it antiquated.38

Bruner views capital mobility’s impact on territorial sovereignty as“double-edged” (p. 234). To Bruner, the ability of MDSJs to attract businessis “profoundly dependent upon territorially defined financial regulatory au-thority” (p. 18). It is for this reason Bruner predicts that “there are powerfuland well-endowed constituencies with strong incentives to maintain territo-rial financial regulation—and, accordingly, territorial sovereignty itself”(pp. 234–35).

This assessment is too crude, in my view, because it underappreciatesthat much of the success of MDSJs is attributable to the nonterritorial na-ture of global financial transactions and the fictional character of small off-shore jurisdictions.39 Indeed, perhaps the single most important reason forthe success of tax havens “lie[s] in their ability to provide protection fromnational regulation and taxation without the need to physically relocate tothe host country.”40 That is, unlike territorially connected productive activi-ties that define other industries—land-based agriculture and the extractives

36. See, e.g., Stephen J. Kobrin, Economic Governance in an Electronically NetworkedGlobal Economy, in The Emergence of Private Authority in Global Governance 43, 45,56 (Rodney Bruce Hall & Thomas J. Biersteker eds., 2002).

37. For an excellent commentary of transnational private regulation in the financial de-rivatives market context, see Gabriel V. Rauterberg & Andrew Verstein, Assessing TransnationalPrivate Regulation of the OTC Derivatives Market: ISDA, the BBA, and the Future of FinancialReform, 54 Va. J. Int’l L. 9 (2013).

38. E.g., Peter Malanczuk, Akehurst’s Modern Introduction to InternationalLaw 7 (7th rev. ed. 1997); Kal Raustiala, The Evolution of Territoriality: International Relationsand American Law, in Territoriality and Conflict in an Age of Globalization 219,219–21 (Miles Kahler & Barbara F. Walter eds., 2006); Alec Stone Sweet, The New Lex Mer-catoria and Transnational Governance, 13 J. Eur. Pub. Pol’y 627 (2006).

39. To be fair to Bruner, this point is not developed at length in the book. Moreover, thebook should be credited for successfully responding to the more extreme claims in the global-ization literature that argue the effect that technological advancement enabling “frictionlesstransfers of money” is essentially erasing “geography.” Pp. 16–18.

40. Palan, supra note 4, at 163.

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industry would be paradigmatic examples—cross-border finance is legallyconstituted. As Katharina Pistor notes in her legal theory of finance, “Finan-cial assets are contracts the value of which depends in large part on theirlegal vindication.”41 Financial instruments and legal regimes are intercon-nected, in that “the rules that establish the game are continuously challengedby new contractual devices, which in turn seek legal vindication.”42

For this reason, I offer a different theoretical account concerning thecomplicated relationship between territorial sovereignty and cross-border fi-nance. To the extent that small offshore jurisdictions offer a way for corpo-rations and HNWIs to escape territorial laws of a state without having tophysically exit the territory of that state, the rapid ascendance of these juris-dictions in cross-border finance may not be a reflection of territorial sover-eignty’s enduring reign. Rather, this ascent may be attributable to certainsegments of territorially configured rules ceding to privately curated juridicalconstructs, ironically in the name of territorial sovereignty.43 That is, it is thegrowing acceptance of private choice that seeks to exploit the juridical sover-eignty of small offshore jurisdictions that more accurately describes the ris-ing preeminence of tax havens. The rise of small offshore jurisdictions,therefore, ought to also be understood as the tendency to deemphasize therelationship between soil and the law.

This understanding has significant doctrinal and theoretical implica-tions largely unrecognized in the existing literature. The most obvious casesof territorial rules being abandoned are in the areas of corporate law andlaws tertiary to corporate law, largely owing to the increasing frequency withwhich corporate entities choose to incorporate in small offshore jurisdic-tions. As summed up by Lorraine Eden and Robert T. Kudrle, nearly allCaribbean and Pacific tax havens “are also headquarters havens insofar asthe low value-added activity is not a subsidiary of a foreign firm but is inde-pendent and legally based in the haven.”44

While private entities’ desire to secure low tax rates may primarily drivethis structure, the effect may be much more than simply shortchanging theInternal Revenue Service. It has resulted in the transformation of offshore

41. Katharina Pistor, A Legal Theory of Finance, 41 J. Comp. Econ. 315, 315 (2013).

42. Id.

43. Cf. Ronen Palan, Offshore and the Structural Enablement of Sovereignty, in OffshoreFinance Centers and Tax Havens: The Rise of Global Capital 18, 20 (Mark P. Hampton& Jason P. Abbott eds., 1999) (explaining that offshore both maintains the state system andremoves the threats of state regulation and taxation, “all done in the name of and by the statesystem itself”).

44. Lorraine Eden & Robert T. Kudrle, Tax Havens: Renegade States in the InternationalTax Regime?, 27 Law & Pol’y 100, 102 (2005). Incorporation in tax-haven jurisdictions doesnot necessarily mean that the entity conducts business in that jurisdiction. See, e.g., AndrewWillins, Shareholder Disputes in the British Virgin Islands, Appleby Resol. Newsl. (Appleby,Hamilton, Berm.), Q1 2014, at 1, 1, http://www.applebyglobal.com/publication-pdf/article/2014/shareholder-disputes-in-the-bvi-(andrew-willins)-february-2014.pdf [https://perma.cc/LVZ9-5573] (explaining that the British Virgin Islands is a popular holding company jurisdic-tion “through which joint venture parties will often co-operate in ventures far removed fromthe shores of the British Virgin Islands”).

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financial havens into producers of laws governing cross-border finance. Be-low, I use recent developments in corporate law and bankruptcy law to showthat the deterritorialization of domestic laws governing certain financialtransactions is already taking place, albeit not without resistance.

A. Corporate Law

Before courts began to articulate the internal affairs doctrine in the1860s, firms had little choice about where to incorporate because states typi-cally required domestic corporations “to maintain economic ties with thestate.”45 The growing mobility of businesses effectively ended the state’s mo-nopoly to impose its laws on corporations doing business in their state.46

Instead, capital mobility established and facilitated the modern charter com-petition, effectively deterritorializing corporate law.47 Thus, corporate law isperhaps the most salient example where the tension between territorial lawsand private choice has been resolved largely in favor of juridical privatechoice over territoriality.48

While the internal affairs doctrine developed in the domestic contextand is predominantly discussed in terms of interstate relations, federal andstate courts are increasingly extending the doctrine to firms incorporatedoutside of the United States. Although largely unrecognized in the extantliterature,49 this extension is important because foreign jurisdictions man-date significantly different rules governing shareholder rights relative to onesavailable under domestic law.

One salient example is the minority investor’s right to bring a derivativesuit—a lawsuit on behalf of the corporate entity for alleged wrongdoing toinvestors, enforcing a right that the managing members have refused to as-sert.50 Because derivative suits fall under the categories of relationshipsdeemed to be the “internal affairs” of a corporate entity, courts typicallylook to the law of the entity’s state of incorporation to determine the appli-cable law.51

45. Tung, supra note 12, at 44.

46. See id. at 60.

47. See id. at 97–100 (summarizing the preconditions, including corporate mobility, thatwere crucial in enabling such competition).

48. See Larry E. Ribstein & Erin Ann O’Hara, Corporations and the Market for Law, 2008U. Ill. L. Rev. 661.

49. See, e.g., Frank H. Easterbrook, The Race for the Bottom in Corporate Governance, 95Va. L. Rev. 685, 698 (2009) (“[I]t is much harder to remove capital from the United States as awhole, and this country does not recognize an internal-affairs doctrine in its dealings withother nations.”).

50. For a general overview, see Daniel R. Fischel & Michael Bradley, The Role of LiabilityRules and the Derivative Suit in Corporate Law: A Theoretical and Empirical Analysis, 71 Cor-nell L. Rev. 261 (1986).

51. See, e.g., Stephenson v. Citco Grp. Ltd., 700 F. Supp. 2d 599, 608 (S.D.N.Y. 2010)(“When deciding issues of ‘shareholder standing,’ that is, whether claims should be broughtdirectly or derivatively, courts must look to the law of the fund’s state of incorporation.”

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Extending the internal affairs doctrine internationally is consequentialsince many foreign jurisdictions—including tax havens—severely limit de-rivative actions. Consider the case of Winn ex rel. Scottish Re Group Ltd. v.Schafer,52 which involved Scottish Re, the second-largest reinsurer in theUnited States,53 incorporated in the Cayman Islands.54 A shareholderbrought a derivative action against Scottish Re’s officers and directors for“breach of fiduciary duties arising out of alleged misrepresentations as to theCompany’s business.”55 Despite Scottish Re’s irrefutable ties to the UnitedStates—evidenced by the shareholder’s allegations that Scottish Re main-tained several offices in the United States and that U.S. investors owned amajority of Scottish Re’s outstanding shares—Scottish Re’s incorporation inthe Cayman Islands proved to be fatal to the shareholder’s suit.56 Citing theinternal affairs doctrine, the court applied Cayman Islands law, which pri-marily looks to English common law for guidance.57 This severely limited theshareholder’s rights because, under English law, “derivative claims areowned and controlled by the company, not its shareholders, and that ashareholder is not permitted to bring a derivative action on behalf of thatcompany.”58

To be sure, the applicability of the internal affairs doctrine outside of theUnited States is not a settled issue. Indeed, some courts have refused to applythe internal affairs doctrine internationally to small offshore jurisdictions ongrounds that there is insufficient nexus between the incorporation jurisdic-tion and the litigants.59 But courts in recent years have increasingly extended

(quoting Debussy LLC v. Deutsche Bank AG, No. 05 Civ. 5550(SHS), 2006 WL 800956, at *3(S.D.N.Y. Mar. 29, 2006), aff’d, 242 F. App’x 735 (2d Cir. 2007))).

52. 499 F. Supp. 2d 390 (S.D.N.Y. 2007).

53. Verified Shareholders’ Derivative Complaint for Breach of Fiduciary Duty, Abuse ofControl, Gross Mismanagement, Unjust Enrichment and Constructive Fraud Seeking Equita-ble Relief and Damages ¶ 1, Winn, 499 F. Supp. 2d 390 (No. 06-CV-10170), 2006 WL 3669780,at *2 [hereinafter Complaint].

54. Winn, 499 F. Supp. 2d at 392.

55. Id.

56. Complaint, supra note 53, ¶¶ 7–8.

57. Winn, 499 F. Supp. 2d at 393.

58. Id. at 396.

59. See, e.g., UBS Sec. LLC v. Highland Capital Mgmt., L.P., No. 650097/2009, 2011 WL781481, at *3 (N.Y. Sup. Ct. Mar. 1, 2011) (“Application of the law of New York is also man-dated on the ground that SOHC has almost no ties to the Cayman Islands. . . . Other thanbeing incorporated in the Cayman Islands, SOHC has no obvious ties to that jurisdiction.”),aff’d in part, modified in part, 940 N.Y.S.2d 74 (N.Y. App. Div. 2012).

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the internal affairs doctrine to famous tax havens, including the British Vir-gin Islands,60 the Cayman Islands,61 and the Bahamas.62

These developments ought to give some pause to domestic courts thatmechanically apply the internal affairs doctrine internationally. Of course,there are reasons to find this emerging jurisprudence unproblematic. Eversince Roberta Romano wrote an influential piece conceptualizing corporatelaw as “products” supplied by states,63 the dominant view in corporate lawpresupposes that corporations choose legal systems that are beneficial forshareholders.64 Under this frame of thought, there appears little reason tothink that increasing the number of “suppliers” competing to provide cor-porate law would be anything but beneficial, at least from an efficiencystandpoint.

Enter taxation into the equation, and efficiency cannot be assumed.Here is why: when the tax rate outside of the United States is lower than theeffective rate at home, “taxpayers will prefer international investments overdomestic investments that, but for the tax regime, would provide more effi-cient returns.”65 This is important because incorporation decisions in thedomestic interstate context do not generally implicate a dramatic altering ofthe effective federal or state tax rate, notwithstanding the differences in statefranchise tax fees. Federal income tax is unaffected because firms operatingwithin the United States must pay federal taxes. State income tax is unaf-fected because corporations must establish physical presence within a stateto be subject to that state’s tax.66 Incorporation in offshore financial havens

60. See Microsoft Corp. v. Vadem, Ltd., No. C.A. 6940–VCP, 2012 WL 1564155, at *4(Del. Ch. Apr. 27, 2012) (“[B]ecause Vadem, Ltd. is incorporated under the BVI BusinessCompanies Act of 2004 . . . [w]hether Microsoft is required to seek leave to bring its derivativeclaims depends entirely on BVI law.”), aff’d, 62 A.3d 1224 (Del. 2013) (unpublished tabledecision).

61. See Krys v. Aaron, 106 F. Supp. 3d 472, 485 (D.N.J. 2015) (“[B]ecause the disputedclaim concerns alleged acts of a former director in his capacity as a director of a Caymancorporation, the internal affairs doctrine presumptively requires the application of CaymanLaw.”).

62. NatTel, LLC v. SAC Capital Advisors, LLC, 370 F. App’x 132, 133 (2d Cir. 2006)(affirming the district court finding that “the law of the Bahamas—where ODC was incorpo-rated—governed [the] dispute because NatTel’s claims involved matters of internal corporategovernance”).

63. Roberta Romano, Law as a Product: Some Pieces of the Incorporation Puzzle, 1 J.L.Econ. & Org. 225, 225–30, 277–81(1985).

64. See Romano, supra note 9, 14–17; Winter, supra note 13, at 256.

65. Avi-Yonah, supra note 8, at 1578.

66. See R. Todd Ervin, State Taxation of Financial Institutions: Will Physical Presence orEconomic Presence Win the Day?, 19 Va. Tax Rev. 515, 516 (2000) (“Under accepted Com-merce Clause jurisprudence, a non-domiciliary taxpayer must have established a substantialnexus with a state in order to be subject to that state’s taxing jurisdiction. States traditionallyrelied on the physical presence doctrine to prove the existence of such a nexus and, accord-ingly, asserted taxing jurisdiction over a non-domiciliary financial institution only when theinstitution had established a physical presence within the taxing state.”).

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alters this dynamic because it often entails gaining juridical residence pre-cisely for the purpose of avoiding or evading domestic taxes.67 When ac-counting for tax incentives, the fact that consumers of corporate law havenot advocated a replacement of the current system, which is often taken asthe best evidence of the welfare-enhancing effects of jurisdictional competi-tion,68 cannot be assumed. At the very least, the topic deserves wider schol-arly scrutiny as to whether a wholesale adoption of the internal affairsdoctrine in the international context is desirable.

B. Bankruptcy Law

Incorporation decisions impact laws beyond corporate governance is-sues. They have already begun to reshape the substantive and procedural lawapplicable in international insolvency law, a body of law governing creditorsand debtors when corporate entities operating in multiple jurisdictions areinsolvent.69

Traditionally, raw territoriality determined the default bankruptcy lawapplicable to corporate entities operating in more than one jurisdiction.Courts of the United States, for instance, exercised “jurisdiction over thoseportions of the company that are within its borders and not those portionsthat are outside them.”70 But a relatively recent multilateral initiativepromulgated by the United Nations provides rules on when each jurisdictionwill “recognize” parallel proceedings in a foreign jurisdiction, thereby ena-bling the law of one jurisdiction to govern assets located“extraterritorially.”71

In the United States, chapter 15 of the Bankruptcy Code implements theinitiative, providing rules on when domestic courts will give deference toforeign insolvency proceedings.72 The code provides that domestic courtsmust defer to foreign bankruptcy proceedings where the debtor has its

67. In the international context, the lack of coordination between nation-states enables“good” corporate tax planning to exempt or indefinitely defer income from taxation by anyparticular jurisdiction. See Jane G. Gravelle, Tax Havens: International Tax Avoidance and Eva-sion, 62 Nat’l Tax J. 727 (2009). Many thanks to Clint Wallace for this insight.

68. Roberta Romano, The States as a Laboratory: Legal Innovation and State Competitionfor Corporate Charters, 23 Yale J. on Reg. 209, 211 (2006) (“The output of this competitionhas been, for the most part, welfare-enhancing. This contention may be best illustrated by thefact that consumers of corporate law—investors, managers, and their lobbying organiza-tions—have not advocated replacing the states’ authority . . . .”).

69. See Sandeep Gopalan & Michael Guihot, Recognition and Enforcement in Cross-BorderInsolvency Law: A Proposal for Judicial Gap-Filling, 48 Vand. J. Transnat’l L. 1225, 1226(2015).

70. Lynn M. LoPucki, The Case for Cooperative Territoriality in International Bankruptcy,98 Mich. L. Rev. 2216, 2218 (2000).

71. Ad Hoc Group of Vitro Noteholders v. Vitro S.A.B. de C.V. (In re Vitro S.A.B. deC.V.), 701 F.3d 1031, 1043 (5th Cir. 2012).

72. Congress enacted chapter 15 in 2005 to “implement the Model Law on Cross–BorderInsolvency . . . formulated by the United Nations Commission on International Trade Law.”Id. Chapter 15 defines foreign insolvency proceeding as “a collective judicial or administrativeproceeding in a foreign country . . . under a law relating to insolvency . . . in which . . . the

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“center of . . . main interests” (“COMI”) in the foreign jurisdiction.73 This isimportant because recognition under chapter 15 allows the debtor to recoverany claims against or any assets of the entities “located within the territorialjurisdiction of the United States.”74

Chapter 15 jurisprudence has resulted in tax havens’ transformationinto producers of law that govern cross-border insolvency proceedings, inpart because of the high number of private entities choosing to incorporatein those jurisdictions.75 Under chapter 15, “the debtor’s registered office,” orthe address designated in a corporation’s incorporation papers,76 “is pre-sumed to be the center of the debtor’s main interests.”77 While this pre-sumption is rebuttable, the difficulty in determining other factors has oftenresulted in courts’ deferring to that presumption. As Lynn LoPucki observes,“[T]hroughout most of the world, a debtor corporation’s country of incor-poration is considered an appropriate venue—if not the appropriatevenue—for the corporation’s bankruptcy case.”78

This is especially true because legal formalities may permit a juridicalcenter of operations appear to be in a particular jurisdiction using littlemore than glorified paperwork. Consider how Bermuda, an island with atiny workforce, became a world-renowned hub for the reinsurance industry,the business of insurance for insurers (p. 59). Importantly, the insuranceindustry relies heavily on nonemployee agents and brokers, to the pointwhere the insurer typically has no direct customer relationship with the in-sured. Under a practice known as “fronting,” for instance, the “insurer sys-tematically cedes most of its insurance exposure to a reinsurer (typically in adifferent jurisdiction).”79 As Edward Kleinbard notes, “[A] reinsurer can infact have a commercial presence in the primary insurer’s jurisdictionthrough the retention of an agent of independent status, thereby facilitatingits reinsurance business in respect of risks in that jurisdiction.”80 Obviously,this has important tax consequences, because domestically controlled insur-ance companies owned by Bermudian parent companies reduce the tax bur-den on their insurance activities without bringing the foreign parent

assets and affairs of the debtor are subject to control or supervision by a foreign court, for thepurpose of reorganization or liquidation.” 11 U.S.C. § 101(23) (2012).

73. 11 U.S.C. § 1517(b)(1) (mandating courts recognize foreign bankruptcy proceedingsfiled in the debtor’s “center of . . . main interests”); id. § 1520 (listing the consequences ofrecognition).

74. In re Gerova Fin. Grp., Ltd., 482 B.R. 86, 88 (Bankr. S.D.N.Y. 2012).

75. See Gravelle, supra note 67, at 741 (reporting that the British Virgin Islands is acountry with over 400,000 registered corporations).

76. See, e.g., In re Tri-Cont’l Exch. Ltd., 349 B.R. 627, 635 (Bankr. E.D. Cal. 2006) (using“the registered office” and “place of incorporation” interchangeably).

77. 11 U.S.C. § 1516(c).

78. Lynn M. LoPucki, Courting Failure: How Competition for Big Cases Is Cor-rupting the Bankruptcy Courts 196 (2005).

79. Edward D. Kleinbard, Competitive Convergence in the Financial Services Markets,Taxes, Mar. 2003, at 225, 236.

80. Id.

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companies into the U.S. net-income tax system.81 But this operational struc-ture also has important doctrinal implications under chapter 15, because ithas resulted in the laws of small offshore jurisdictions, including the laws ofBermuda, governing insolvency proceedings of corporate entities with sub-stantial connections to the United States.

Consider the case of In re Gerova Financial Group, Ltd., a chapter 15proceeding involving two limited liability companies registered in Bermudaunder the Bermuda Companies Act.82 Gerova was an investment companywith significant assets in the United States specializing in acquiring “illiquidhedge fund assets, which it planned to use as capital for insurance regulatorypurposes.”83 Following a published report by a U.S. securities analyst claim-ing that the company was a “Ponzi scheme,” Gerova was subject to severalsecurities suits in the United States, ultimately resulting in Gerova ceasing allbusiness.84 After creditors petitioned a court in Bermuda to commencewinding-up proceedings, liquidators filed a chapter 15 petition asking thebankruptcy court in New York to give recognition to the Bermudian insol-vency proceeding.85 The court granted the petition, notwithstanding the pe-titioner’s concession in the briefs that the companies were “exemptedcompanies” under Bermudian law, meaning that they were incorporated forthe purpose of carrying on transactions and activities which are external toBermuda.86 The court’s reasoning, which included the observation that Ber-muda was “the location of its corporate books and records,”87 is revealing,given the court’s acknowledgment that “Gerova may have had significantassets in the United States.”88

In re Gerova is hardly an unusual case. Indeed, the jurisprudence’s defer-ence to foreign bankruptcy proceedings has been bolstered by recent courtdecisions treating the relevant time period for COMI determinations aswhen the chapter 15 petition is sought. Consider the seminal case of In reFairfield Sentry Ltd., involving one of the largest of the “feeder funds” thatinvested $7 billion with Bernie Madoff’s firm, Bernard L. Madoff InvestmentSecurities LLC.89 Sentry was a classic offshore fund, organized under thelaws of the British Virgin Islands (“BVI”) as a vehicle for non-U.S. persons

81. Id.

82. 482 B.R. 86, 88–89 (Bankr. S.D.N.Y. 2012).

83. In re Gerova, 482 B.R. at 88–89.

84. Id. at 89.

85. Id. at 89–90.

86. See Memorandum of Law in Support of Verified Petition at 20, In re Gerova, 482 B.R.86 (No. 12-13641-alg). In other cases, this status triggers courts to find that a genuine issue ofmaterial facts exists as to an entity’s COMI. See, e.g., In re Basis Yield Alpha Fund (Master),381 B.R. 37, 48 (Bankr. S.D.N.Y. 2008).

87. In re Gerova, 482 B.R. at 91.

88. Id. at 89.

89. No. 10 Civ. 7311(GBD), 2011 WL 4357421, at *1 (S.D.N.Y. Sept. 16, 2011), aff’d,Morning Mist Holdings Ltd. v. Krys (In re Fairfield Sentry Ltd.), 714 F.3d 127, 130 (2d Cir.2013).

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and tax-exempt U.S. entities to invest in the Madoff fund.90 While the fundcalled the BVI its juridical home—meaning that it had its registered office,registered agent, registered secretary, and corporate documents located inthe BVI—Sentry’s board of directors oversaw the management, with day-to-day operations handled by an investment manager, Fairfield GreenwichGroup, based in New York.91 Despite these significant U.S. connections, theSecond Circuit affirmed the lower court’s finding that the COMI was theBritish Virgin Islands, largely based on the assessment that “the relevanttime period is the time of the chapter 15 petition.”92 In this case, by the timechapter 15 proceeding was sought, it was a year and a half after the revela-tion of the notorious Madoff fraud, whereby “the Debtors discontinued thetransfer of funds for investment with [Madoff’s firm] in New York . . . [andhad] no place of business, no management, and no tangible assets located inthe United States.”93 It is revealing, then, that Sentry’s incorporation statusin the BVI—in the absence of routine business activities there during theinsolvency period—pointed towards the BVI as the center of main interestfor chapter 15 purposes.

To be sure, the statutory language in chapter 15 does not conflate COMIas the place of incorporation, and some courts have refused to recognizeforeign proceedings taking place in offshore jurisdictions merely on the basisof a corporation’s incorporation situs.94 That being said, bankruptcy courtsin recent years have recognized foreign proceedings in cases involving corpo-rate entities incorporated in notorious tax havens, including the British Vir-gin Islands,95 Bermuda,96 and the Cayman Islands.97

This development is significant from several perspectives. From an eco-nomic-efficiency point of view, the deterritorialization of bankruptcy lawmay not be news to bemoan about. In a seminal piece, Douglas Baird andThomas Jackson famously articulate the goal of bankruptcy law as enhanc-ing the collection efforts of those “who, outside of bankruptcy, have prop-erty rights in the assets of the firm.”98 To the extent that privileging acorporation’s juridical residence helps move the international insolvencysystem towards a so-called universalist system—where a debtor’s “home

90. In re Fairfield, 2011 WL 4357421, at *1.

91. Morning Mist Holdings Ltd. v. Krys (In re Fairfield Sentry Ltd.), 714 F.3d 127, 130(2d Cir. 2013).

92. Id.

93. Id. at 138.

94. See, e.g., In re British Am. Ins. Co., 425 B.R. 884, 914–16 (Bankr. S.D. Fla. 2010)(declining to recognize an insolvency proceeding in the Bahamas as foreign main proceeding,notwithstanding the company’s incorporation under Bahamian law).

95. E.g., Morning Mist Holdings, 714 F.3d at 137–39.

96. E.g., In re Gerova Fin. Grp., Ltd., 482 B.R. 86, 88–89 (Bankr. S.D.N.Y. 2012).

97. E.g., In re Bancredit Cayman Ltd. (in Liquidation), No. 07 Civ. 11338(LAK), 2008WL 919533 (S.D.N.Y. Mar. 31, 2008).

98. Douglas G. Baird & Thomas H. Jackson, Corporate Reorganizations and the Treatmentof Diverse Ownership Interests: A Comment on Adequate Protection of Secured Creditors in Bank-ruptcy, 51 U. Chi. L. Rev. 97, 103 (1984).

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country” exercises worldwide jurisdiction over its bankruptcy99—offshorejurisdictions may combat perceived evils like forum shopping. Such evilsthat are aggravated by a purely territorial system in which multiple sover-eigns apply their own laws based on the physical location of each of thebankrupt entity’s assets.100 Indeed, scholars have argued that certain forms ofprivate ordering in bankruptcy law may heighten efficiency.101

But efficiency is not the only game in town. For one, the displacementof domestic bankruptcy laws implicates subversion of the local law’s concep-tion of procedural justice. In the United States, for instance, civil proceed-ings are generally matters open to the public, under “a strong presumptionof public access to court records.”102 The right to public access to judicialdocuments predates the Constitution103 and is further enshrined in “thepublic’s [F]irst [A]mendment right to know about the administration ofjustice.”104 Such nonlitigant rights may be subject to erosion under a deter-ritorialized system of governance. For instance, the creditors in In re Fairfieldobjected to the British Virgin Islands proceeding on grounds that it was“cloaked in secrecy,” and therefore against “U.S. public policy.”105 Althoughthe BVI liquidation proceeding indeed took place under seal, the SecondCircuit rejected the argument, reasoning that “public summaries have beenmade available” and that “restricted access to court documents is not unu-sual in the BVI.”106

Then, there is also the problem of applying foreign law that may be atodds with the local law’s conception of distributive justice.107 To be sure, anefficiency-oriented scholar may view the application of a foreign jurisdic-tion’s insolvency laws as unproblematic, reasoning that those jurisdictionswould have an incentive to devise insolvency laws with strong creditor pro-tection in order to make the companies attractive to investors. But this viewtakes a rather narrow view of the bankruptcy law’s function. Indeed, thepurpose of bankruptcy law is by no means a settled issue, and it may includethe interests of various stakeholders besides creditors. As Elizabeth Warren

99. LoPucki, supra note 70, at 2220.

100. John A.E. Pottow, The Myth (and Realities) of Forum Shopping in Transnational Insol-vency, 32 Brook. J. Int’l L. 785, 787–88, 814–16 (2007).

101. Robert K. Rasmussen, Resolving Transnational Insolvencies Through Private Ordering,98 Mich. L. Rev. 2252, 2275 (2000).

102. Video Software Dealers Ass’n v. Orion Pictures Corp. (In re Orion Pictures Corp.),21 F.3d 24, 26 (2d Cir. 1994) (citing Nixon v. Warner Commc’ns Inc., 435 U.S. 589, 597–98(1978)).

103. United States v. Amodeo, 44 F.3d 141, 145 (2d Cir. 1995).

104. Video Software Dealers Ass’n, 21 F.3d at 26 (explaining that the policy of open accesscodified in the Bankruptcy Code “evidences [C]ongress’s strong desire to preserve the public’sright of access to judicial records in bankruptcy proceedings”).

105. Morning Mist Holdings Ltd. v. Krys (In re Fairfield Sentry Ltd.), 714 F.3d 127, 139(2d Cir. 2013).

106. Id. at 140.

107. For a seminal work on distributional justice, see Anthony T. Kronman, Contract Lawand Distributive Justice, 89 Yale L.J. 472 (1980).

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explains, corporate bankruptcy typically involves a large number of constitu-encies, owing to the fact that corporations “tend to falter during active,sometimes frantic, operations, leaving contracts in various states of per-formance and nonperformance; owing past-due bills along with contingentfuture obligations; and disappointing legions of suppliers, employees, cus-tomers, creditors, and others who fear that they will not get all they hadexpected from their dealings with the debtor.”108

It is for this reason that mechanical application of foreign law to insol-vency proceedings with significant connections to the United States may un-dermine the function of American bankruptcy policy. As Andrew Dawsonnotes, “While haven jurisdictions have an incentive to pass strong creditorprotections in order to make haven-registered companies attractive to inves-tors, they have little incentive to protect employees, trade creditors, andother interests impacted by business failures.”109 At the very least, thereneeds to be a more honest admittance that much of the normative assess-ment of the impact of tax havens is contingent on the academic paradigmone chooses to adopt.

Conclusion

Critics of tax havens are highly attached to the traditional, territorialview of the world: productive economic activities territorially connected to aparticular jurisdiction bestow that jurisdiction the right to levy taxes forthose activities. Tax havens appear problematic because they upset our senseof social contract. As Thomas Piketty explains, “[I]f some of the wealthiestindividuals and some of our largest corporations use tax havens and fiscaldissimulation in such a way that they avoid paying taxes almost entirely,then it is our basic social contract that is at stake.”110

Christopher Bruner’s book provides a valuable service in showing thatmany small offshore jurisdictions—principally MDSJs—add more valuethan merely serving as juridical “parking lots” designed to help corporationsand HNWIs evade or avoid taxes. But it also raises some important counter-vailing considerations, including our jurisprudential tendency to tolerateprivate entities that transcend territorially configured domestic legal order-ing, bootstrapped with lip service to territorial sovereignty.

In this Review, I highlight that small offshore jurisdictions not only al-low transnational corporations to structure their operations to minimizetaxes, but in doing so become emerging legal hubs producing rules gov-erning global financial transactions. This necessarily involves the erosion

108. Elizabeth Warren, Bankruptcy Policymaking in an Imperfect World, 92 Mich. L. Rev.336, 343 (1993).

109. Andrew B. Dawson, Offshore Bankruptcies, 88 Neb. L. Rev. 317, 319 (2009).

110. Thomas Piketty, Foreword to Gabriel Zucman, The Hidden Wealth of Nations:The Scourge of Tax Havens, at vii, viii (Teresa Lavender Fagan trans., 2015).

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and reconstitution of domestic legal ordering. Whether, and what, conse-quences to society may result from this trend, is an issue of importanceworthy of further scholarly scrutiny.